There is a need for wholesale reform in the way financial crime is tackled. This was the blunt message delivered by Stuart Levey, chief legal officer, HSBC</strong>, and keynote speaker at the opening of Sibos 2016’s compliance stream.</p> “We are poised to create the momentum to make a true paradigm shift,” said Levey. Two countervailing forces are at play; a deep public policy commitment to combat financial crime and preserve the integrity of the financial system, coupled with growing concern among policy-makers over the unintended consequences of financial exclusion through de-risking. “De-risking is being applied as an alternative to managing risk,” cautioned Levey.</p> To reconcile these imperatives, more precision is required in how illicit conduct within the global financial system is targeted. This can only be achieved by improving collaboration and information-sharing across the public and private sector, said Levey. There are four critical components to this increased level of interaction. It has to be cross-border, in real time, among private sector actors, and between government and industry.</p> “The case for a new standard on information sharing is overwhelming,” said Levey. The Financial Action Task Force (FATF) has a critical role to play. “They could set standards around the sharing of information for financial crime risk management.”</p> Information-sharing takes many forms – between regulators and banks, within and between banks, between banks and their clients, and between banks and third parties such as utilities, to name a few. Over the course of four days, panels and presentations across Sibos 2016’s compliance stream explored all these and more in detail, with the aim of enhancing industry efficiency and effectiveness in tackling financial crime.</p> Zero tolerance</strong></p> De-risking was the focus of Monday’s panel, ‘How to safely bank low-risk clients in high-risk jurisdictions’. Banks were de-risking correspondent relationships even before FATF mutual evaluations were done, said Julie T Katzman, chief operating officer at the Inter-American Development Bank</strong>. “Banks looked like they were developing a zero tolerance on the risk spectrum.”</p> Correspondent banking relationships decreased significantly over the course of 2014 and 2015, noted Richard Lalonde, senior financial sector expert, IMF</strong>. The effect was most marked in the Caribbean where more than a dozen indigenous banks have had their relationships severed with global banks. “There’s a danger that some countries could be cut off the global payment network,” said Jochen Metzger, director general of payments and settlement systems, Deutsche Bundesbank.</strong></p> What seemingly amounts to a blanket approach to de-risking is due in part to banks operating in an environment in which they are unsure what regulators will do. “That creates fear and when banks make decisions based on fear, they do not tend to optimise,” said Katzman.</p> Correspondent evolution</strong></p> The need for clarity from regulators was echoed in the session, ’Evolution of correspondent banking’, which examined the impact of increased financial crime compliance obligations on the correspondent banking model. “Regulators need to give us clear standards,” said Patricia Giangrande, global head of business control office, institutional cash management, Deutsche Bank</strong>.</p> “The decline and concentration of correspondent banking is a cause for concern for regulators globally,” observed Alexander Karrer, Switzerland’s deputy state secretary for international finance, speaking in his capacity as chair of the correspondent banking coordination group at the Financial Stability Board (FSB)</strong>. This can affect the ability to send and receive international payments and drive financial flows underground, he cautioned.</p> Faced with sanctions compliance, a nuanced approach to de-risking is called for. Larisa Zalomikhina, group head of compliance at Sberbank</strong>, said it was imperative that customers understood and identified different types of sanctions. In the case of Russia, she said, “It took time to explain that restrictions applied to long-term financing and not correspondent banking.”</p> The cost and inconvenience caused to customers by correspondent banks’ financial compliance measures could play a significant role in their ultimate effectiveness, suggested Olivier Denecker, director of knowledge, McKinsey</strong>. To this end, regulators should focus as much on the cost of compliance as its effectiveness. “It is where you draw the line on risk,” he said.</p> Karrer agreed there was a need to distinguish between higher and lower risk situations in correspondent banking and that this was an area being explored by the FSB. “There is no intention to add additional layers of regulation. Rather, we are looking to provide clarity and to make regulation as effective and cost-friendly as possible,” he said.</p> </div> </div> </div> Tipping point</strong></p> Are shared utilities reaching a tipping point? That was the central theme of the panel focusing on compliance utilities. For David Fleet, managing director, client onboarding & management at Standard Chartered</strong>, the answer was a qualified “yes” when it came to The KYC Registry and its use in correspondent banking for onboarding and review. At a regional and national level, utility solutions are gaining momentum for a variety of purposes, such as SIRESS for cross-border payments between member countries of the Southern African Development Community. “It remains to be seen what will happen on a global scale, but certainly within local and industry-specific areas we are definitely reaching a tipping point,” concluded Fleet.</p> “Reaching a tipping point doesn’t mean we are out of the woods in terms of how we will best use utilities,” observed Mark Gem, chief compliance officer and member of the executive board, Clearstream</strong>. While bank-to-bank KYC is forging ahead, in the world of the end-client and corporates, the jury is still out, he said.</p> On the subject of further mutualising financial crime compliance costs and efforts, Matthew Russell, partner, financial crime, PwC</strong>, said there was a lack of consensus between banks over use of internal versus third-party sanctions screening solutions. “The whole concept of a utility is about breaking down barriers,” said Barbara Patow, global head of money laundering, financial crime compliance, HSBC</strong>. “As banks we have to get together, dispel the fear factor and innovate.”</p> Mother of invention</strong></p> Banks have always been able to make a virtue out of a necessity. Opportunities to extract value from compliance data were discussed in the session, ‘Utilising compliance data assets to generate new business opportunities’. Jim Wadsworth, managing director, Accura at Vocalink</strong>, said the UK payments processor was already aggregating billions of transactions annually to create a real-time picture of the UK economy. “That is potentially valuable from a public policy or capital markets perspective.”</p> Although almost a quarter of audience members said they were already reusing data collected for compliance purposes to personalise banking products and services, with a further 20% at a planning stage, over a third had no plans. The panel felt the polling provided an accurate reflection of the market, with Eric Clapton, head of retail financial crime prevention programme, Lloyds Banking Group</strong>, encouraging banks to utilise their investment in compliance to create sustainable resources.</p> You can watch a number of recordings from this year’s Compliance stream on sibos.com</a> </em></p> </p>